Taiwan's capital outflow to China has weakened Taiwan's economy. A new solution has been proposed to save Taiwan's economy from being hollowed out and marginalized, namely, the "capital back-flow mechanism." This solution seems to suggest that it would be better to encourage a flow of capital back to Taiwan than to prevent a capital outflow to China. Taiwan's newspapers have recently discussed ways of putting such a mechanism to work -- redirecting the one-way capital outflow by offering tax incentives on the repatriation of capital, lifting bans on the inflow of Chinese capital to Taiwan, in order to balance cash flows on both sides, and allowing Chinese people to visit Taiwan to boost the tourism
industry.
I do not oppose the use of such incentives to help bring capital back to Taiwan, since they stand for an alternative policy direction. But if this mechanism is to lower thresholds on investments in China and permit businessmen to sink a large amount of capital there, we might lose more than we gain.
This would be as stupid as a shepherd who opens a gate for two stray sheep at the cost of losing hundreds of sheep originally behind the fence. Obviously, once the market is open, the amount of Taiwanese capital flowing outward will be dozens of times greater than that of the inflow. Furthermore, a capital drain to China will certainly improve China's investment environment and enlarge China's market. By then, Taiwanese capital will be sucked into China, instead of flowing back. Since the Chinese authorities continue to strictly regulate foreign capital, are the proponents of the above-described mechanism naive enough to believe that Taiwanese capital will flow back home in large amounts after it has gone westward to China?
Some have suggested lifting the bans on Chinese capital to balance the cash flow on both sides, which is surely more perplexing. We seem to be stricken again by incurable egomania, believing that Taiwan is as big as China. The architects of such proposals should calculate in advance how much Chinese capital we can accept. With only US$200 million ro US$300 million from China per year, it is impossible to strike a balance on investments between both sides of the Strait. Such a proposal would amount to a one-sided victory for China, instead of a win-win situation.
So, how about receiving US$5 billion to US$6 billion per year? This is the annual average amount of Taiwanese investment in China and a similar amount of investments from China would truly balance the mutual cash flow.
If that were to happen, however, Taiwan's relatively small economy might end up being totally controlled by China. Although people from Taiwan invest hundreds of billions of US dollars in China, we cannot dominate its market since China is too big. If China throws US$20 billion to US$30 billion of investment into Taiwan, it will pose a very serious problem. Since China is not a democratic country, all the firms in Taiwan that receive Chinese investment will become pro-unification. Taiwan's government officials will not be able to check who is the "boss" behind the cash.
The same applies to lifting bans on Chinese tourist visits to Taiwan. When people from Taiwan visit China, they are either tourists or investors plain and simple. It may not be so simple, however, when Chinese come to Taiwan. If we follow Japan's example by imposing layers of restrictions on Chinese tourists and allowing only 20,000 or 30,000 Chinese to visit Taiwan per year, this will do no good to Taiwan's tourist industry. Such an approach will therefore draw criticism. But if we open our doors and accommodate 1 million people as requested by Taiwan's tourism industry, there will be an average of around 20,000 Chinese tourists a day, if each of them stays here for seven days on average. When 20,000 Taiwanese stay in China they are like a needle in a haystack, but it is by no means a trivial matter when 20,000 Chinese are in Taiwan. Add to this the illegal immigrants and those who overstay their visas and we would be extremely lucky not to face a Trojan-horse army.
I am not against allowing Chinese tourists to visit Taiwan, but there must be some restrictions, which must be implemented strictly. It is for the same reason that I only oppose investing too much in China, but not investments per se. It is also why I do not oppose "the three links," but instead advocate that an effective national economic security mechanism be established beforehand.
Taiwan, with an economy one-thirtieth the size of the US economy, invests two or three times more in China than the US does. Obviously, such massive investment has exhausted Taiwan. If the Taiwan government further implements the "capital back-flow mechanism," wishfully thinking it can balance the mutual capital flow and using it as a pretext for allowing the industrial exodus, it will have precisely the opposite effect, leaving the entire economy in an even worse state.
Some free market advocates believe that it would be better to encourage capital to flow back than to prevent a capital drain. We understand the effectiveness of market principles. But even though market principles are universally applicable, they simply cannot be applied to cross-strait trade because China does not follow market rules and has an ulterior motive -- to annex Taiwan. In addition, there exists a great disparity between China and Taiwan in terms of land area, and the shared languages and customs of the two sides of the Strait are disadvantageous to Taiwan and may even marginalize it. Ignoring the above-mentioned factors and blindly following market functions will eventually jeopardize Taiwan's sovereignty. The Trojan horse will already be in the city when Taiwanese capital fails to flow back and Chinese capital floods Taiwan's market. By then it will be too late for regrets.
Huang Tien-lin is a national policy adviser to the president and former chairman of First Commercial Bank.
Translated by Jackie Lin
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